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Risks

33 Risk Management Examples

John Spacey, updated on March 03, 2017

Risk management is the process of identifying, assessing, reducing and accepting risk. Efforts to avoid, mitigate and transfer risk can produce significant returns. Risk management also leads to a culture of explicitly accepting risk as opposed to hiding in the optimism that challenges and failures aren't possible. The following are hypothetical examples of risk management.

Risk Avoidance

An investor identifies a firm's debt as a risk and decides to sell the stock and exclude it from their portfolio until the situation improves.

Information Technology

An organization is considering a large scale IT project. They conduct a risk identification and assessment process and discover a large number of high probability, high impact risks. They decide to look at alternative approaches such as incremental improvements.

Quality of Life

An employee avoids quality of life risks by rejecting a job offer from a firm that doesn't align to their lifestyle or values.

Customer Credit Risk

A wholesaler conducts a credit risk analysis on its current customers. The firm decides to stop extending 90 day invoice terms to several customers it views as a high risk. Such customers are asked to pay upfront for new orders.

Industry Strategy

An automotive firm investigates the feasibility of manufacturing an aircraft. They decide the risks outweigh the rewards.

Contract Risk

An American firm avoids exchange rate risks by pricing contracts in USD.

Risk Mitigation

A project mitigates the risk of being late by assigning more resources to a critical task that has many dependencies.

Space Technology

Procedures for maintenance to a spacecraft are carefully designed to mitigate risks such as dropped tools that become dangerous space junk in the same orbital range as spacecraft.

Compliance

A bank mitigates compliance risks by implementing controls on its processes, procedures and technologies.

Seasonal Risk

A ski resort operator mitigates seasonal risk by investing in summer sports and recreational facilities such as a water park.

Regulatory Risk

A monopoly mitigates the risk of new regulations in its industry by improving customer service and its reputation with the communities in which it operates.

Cities

A city mitigates air quality risks by taxing parking lots and using the funds to reduce public transit fees and extend services.

Safety Risk

An airline mitigates safety risks by auditing maintenance processes and procedures for latent human error.

Small Business Strategy

A small business identifies a number of competitive risks associated with a plan to open a new location. They mitigate a number of these risks by choosing a location that has a significant foot traffic with no other cafes and restaurants in the neighborhood.

Construction Projects

A construction project mitigates health & safety risks by applying Prevention Through Design techniques that make a building safer to construct.

Refinancing Risk

A firm mitigates refinancing risk by issuing debt with a long maturity when interest rates are low.

Liquidity Risk

A small business mitigates liquidity risks by minimizing upfront investments with techniques such as renting locations as opposed to purchasing.

Information Security

A technology department mitigates information security risks by scanning all incoming emails for spam. Employees are trained to identify suspicious emails that make it through filters and know to report them immediately.

Market Risk

A farmer who plants corn faces a risk that the price will go down before the corn reaches market. They mitigate this risk by entering into an early contract for some of their anticipated crop to deliver corn at a fixed price.

Innovation Risk

A media company with a reputation for innovation engages in experiments to test new business concepts. Such experiments often fail and represent a highly probable type of risk. They mitigate this by designing experiments to fail quickly, cheaply and safely.

Risk Transfer

A fashion company outsources a number of its information technology capabilities to transfer technology risks to outsource vendors. If systems go down, the vendor may have to pay penalties.

Business Interruption Insurance

A restaurant purchases business interruption insurance in addition to property insurance to transfer risks of lost revenue after a disaster or fire.

Reinsurance

An insurance company transfers certain financial risks to a reinsurance company in exchange for a fee.

Logistics

An ecommerce company purchases insurance on its shipments that transfer the risks of lost and damaged items to an insurance company.

Risk Sharing

Dozens of IT teams in the same organization each have a limited number of project managers. As such, resignation of a project manager represents a resource risk for each of the teams. They decide to share this risk by pooling project managers under a Project Management Office with shared resources. If one project manager resigns, the impact is shared amongst the teams.

Supply Risk

A fast food restaurant in a small city receives food deliveries twice a week. With each order the head manager must balance a risk of running out of ingredients with the risk of being wastefully overstocked. They develop a policy of sharing the risk with two other locations in the same city. If one location runs out of onions, the others will share onions.

Risk Acceptance

An investor buys stock in an innovative company with a high valuation. They accept the risk that it could go down significantly because they feel the reward could also be large.

Risk Models

A bank accepts credit risks by measuring risk levels according to appropriate models and setting risk levels that can't be exceeded.

Procurement Risk

A small retailer orders from a supplier with a reputation for being late with shipments. They accept this risk because they have a good price on a number of items.

Weather Risk

A water park accepts the risk that most of their income is dependent on summer weather. They keep spending low and build cash reserves for poor seasons.

Accelerated Project Delivery

A project sponsor asks that a project be accelerated to launch early. They accept that this increases the risk of a variety of project failures including running overbudget, quality issues and operational problems.

Foreign Exchange Volatility

An American firm prices a contract with a Japanese customer in yen. They accept the risk that the deal may be unprofitable if the yen goes down in value before payment is received.

Concentration Risk

A farm that is particular good at producing organic tomatoes puts 90% of their resources into tomatoes in a season. They accept the risk that the price of organic tomatoes may fall before they reach market.

Political Risk

An electronics manufacturer decides to open a factory in a country that's somewhat politically unstable. They accept the risk that political events may disrupt production at the factory.